Is (was) the Bailout a good idea?
My standing on the bailout is clear. It should not happen. And here’s my reasoning.
What a shame…why should we pay for banks that failed and people that were careless enough to borrow money they could not repay? Since when has the government decided to take such matters in its hands? As always, we - responsible taxpayers that are not in the sinking subprime boat and were smart enough to save up and do the right thing (not borrow money to live a life that we could not afford) - get to pay for doing the right thing. I hope it gets voted down again. I don’t care if the economy goes into recession. That’s what the country deserves for being careless.
Taxpayer money is for things that the constitution recommends as the Government’s duties (like building roads, maintaining homeland security, etc.). Meddling into the economy is not such a smart thing in my opinion. The truth is that nobody (not even the President’s smart economic advisers) understand how exactly the the country’s or the world’s economy works. Free economy has worked for almost a century now and makes sense. You let the market decide its own fate. When you meddle, it helps some in the short term, no doubt, but it messes most people up in the longer run. We want not just a better tomorrow, but prosperous days next week as well.
The bailout will only prolong the problem. If the bailout is accepted:
1. Dollar will drop significantly over the next 6 months.
2. Treasury will be poorer, and national debt will go up, so more taxes have to happen.
3. Banks will prosper again and do the exact same things because nothing that they did was illegal. It was just bad business decisions. And they will do the same thing again.
The biggest problems:
4. People will have access to credit again. They will continue buy their bigger-than- ever big screen TV and houses they can’t afford, until this situation happens again in 2/3/5 years.
5. No incentive for anyone to do anything different to make the country better. The govt. is taking that responsibility by writing out a blank check.
If the bailout is rejected:
1. Country will go into recession.
2. People and companies will be forced to innovate to restore their standing in the world. They will face realities such as the labor crisis in the country, competition from the rest of the world, enormous trade deficit (53 trillion I believe), and so on. Soon enough, in a few painful years, the country will bounce back. Innovation will be the bailout.
Feel free to comment…
Are you for the bailout or against it?
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October 3rd, 2008 at 4:55 pm
I think the approval of the “bailout” is a good decision, and here is why I think so.
1) It averts a major crisis in credit availablity and cash liquidity (needed to keep the wheels of main street US moving) and can help even keep California and other states afloat. 90% of small and large businesses depend in some way, shape or form on their local bank for working capital, and the bailout will continue to allow them access to the lines of credit to run their business.
2) It gives the economy some time - the all important salve - to take additional actions, like the innovation you describe - to make changes to the way we do things, without forcing multiple millions of bankruptices
3) This is not truly a “bailout”, it is the purchase of overvalued securities by the government - not all of it is lost, since a lot of mortgages were taken by responsible people who can and will make payments, and ensure that the securities that they were based on, retain value.
4) The impact of multiple game changing market moves in the financial sector is not yet fully felt - the ripple from the sudden and abrupt consolidation will be forthcoming - and the bailout will give corporate and main street America some really needed breathing space to take stock, and become more competitive.
This is a call to America to become more competitive, and like this country did twice before in its history, the Unites States will emerge from this, strong, over the next 5-10 year period. The “bailout” will help us along for a couple of those years until the economy can expand.
Hope this analysis help clarify my line of thought.
October 5th, 2008 at 3:48 pm
In my opinion, what you describe is the ideal situation.
In my opinion, America does not really understand the seriousness of the situation.
I agree that buying Time can help stabilize the economy. Time can also make people forget what happened before. A hot nationally-discussed event today can be a thing of the past a week from now. Things move on, go back to the same thing again, and people get complacent. The common man and the majority of the businesses will react to the bailout as “Great, everything’s OK now” and go back to doing things the same way as they did before. “The Banks messed up, the Govt. bailed us out”. There is no “me” in that statement, see my point? The Govt. is there to fight against crisis. My job is just to live the same careless life-of-debt that I’ve been doing forever (because I don’t even know how else to live).
A “jolt” is what we needed in my opinion. Something that makes us act NOW and forces us to come up with ideas and ways to stay ahead. Time is truly of the essence. Every day that the bailout buys us, is another day wasted in not trying to be any different or change anything.
Even if all that I said above is proved wrong (I do hope for that now, since the Bailout already passed), even then I believe that intervening into free market is always a huge risk. The Govt. now has sort of accepted responsibility of keeping the country’s market stable, which truly is not their business, or within their power either, in my opinion.
October 7th, 2008 at 10:26 am
I think the appreciation for the depth of the liquidity crisis is not yet clear from your analysis. Even with the bailout, the banking industry will tighten lending criteria as a result, which will have the same impact.
The jolt will come - there is a tightening of the secondary credit markets, which encourage very conservative lending practices. Small, medium and large businesses can, and are failing every day for want of working capital.
This needs to be arrested quickly, or at least slowed down by government intervention, or we will enact 1929 all over again - and the only reason the economy grew then is because of the world war that followed, which helps increase government consumption and stimulated the economy by creating jobs.
If you know the story (look it up) of how we came out of a similar situation in the early 20th century when JP Morgan stepped (with private capital) into the role that has now been given to the government (Treasury) which resulted in the birth of the Federal Reserve.
There are cycles of economic expansion and correction, and intervention to decelerate the contraction is occurring widely worldwide, not because free market philosophy was a mistake, but because a secondary, stabilizing organization (the government) has a governing role to play. Do understand - even today, government legislates to moderate or impose regulation on the way free markets operate.
Consider this bailout an acknowledgement that mistakes do happen, and our early attempt to fix this. This may well be a mistake, but doing nothing is clearly not the answer - it could make the crash of 1929 look tame.
October 7th, 2008 at 9:24 pm
The fundamental problem with the bailout approach is that the people that goofed up (Banks and home owners that bought homes without any thought about paying their mortgages off) go scot free. The Govt. has to take a tough stand too sometimes and say - you guys goofed up, you’ve got to pay. Instead, they make the rest of the people that saved and did the right thing pay to bail out the wrongdoers. A good analogy to this is giving in to a terrorist’s threat, if you don’t pay the bad guys, the good guys will suffer, so let’s pay the bad guys.
Here’s a thought. Instead of simply bailing out the banks and the mortage defaulters, couldn’t the Govt. come up with a creative plan where private parties can buy these securities for a bargain and profit from them when they recover in value? Why does the Govt. have to bail them out? Why not “regulate” markets alone to facilitate markets to bail themselves out? I am no economist, so I am sure I am not thinking this through, but surely, there are people out there that could have come up with a better idea than writing out a $700B check..
And even more interesting is this article about who is going to handle the $700B. http://blogs.wsj.com/deals/2008/10/06/meet-neel-kashkari-the-man-with-the-700-billion-wallet/
Sounds like the backward trend has started already…
November 1st, 2008 at 7:14 am
joy of non-recourse loans..
this is so funny I had to post it here.
http://market-ticker.denninger.net/archives/636-Stop-Paying-Your-Mortgage-Today.html
Quotes follow…
“See, in many states purchase-money first mortgages are
“non-recourse” , meaning that all they can do is ruin your credit and
foreclose on your house.
That’s it.
They cannot force you into bankruptcy, they cannot garnish your wages.
And from the time you stop paying until the time you get evicted, you
get to live there for free.
Finally, after you have been foreclosed upon, your house (and lots
like it if your friends and neighbors do likewise) will drop
dramatically in price. Presto! In a year or two you will be able to
buy it back at half what you paid for it in 2004 or 2005. Now that’s
a bargain.
So give the government and the banks back what they’re trying to give
to you”
November 3rd, 2008 at 12:54 pm
That article is great…I am not sure how many, if any, will act on his recommendation but it makes perfect sense. Unfortunately, those that are following the path that he recommends are doing so, not as a strategy, but rather from the lack of it.
We were talking about this yesterday, people in America have a skewed understanding of “need”. A friend of my wife is a single mom who sometimes doesn’t have money to pay for the $5 pot-luck party on Friday but waits for the paycheck to arrive so she can go get her $300 purse. One of my colleagues got laid off his last job and took a pay-cut to move to my town. His first house at his last location is still up for sale for more than 2 years, at a much lower value. And most unfortunately, his wife has been sick for a long time and the bills are now piling up. And he has another mortgage to pay from his house here. I know he’s worried about his situation that didn’t stop him from buying his third car - he has 3 cars (for the two of them) and three dogs and lives in a huge house here. He also buys expensive computer equipment as a hobby. Now how on Earth does that make sense??? I’ve tried to reason with him (he’s a good friend) and he says he “needs” all that..
Every country has its pros and cons. This is one of the biggest problems that America has - it’s citizens are living in a “dream” world where they think everything’s always going to be alright. And their government actually encourages that by taking good money and throwing it after bad money. Living in a developing nation means that you need to deal with corruption, scandals, and the lack of regulation, meaning that the wealthy get away with exploiting the middle class and it’s much harder to break away from the pack. In developed nations, the issues come in other forms such as this one. Your hard earned money is going to be taken away and given as a gift to wrong-doers and there is absolutely nothing you can do about it (except, crib about it on your blog of course ;)..
December 23rd, 2008 at 11:41 am
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